Summary
Two of the pillars of the recent bull market are that cash is waiting on the sidelines and the worst of the housing market is behind us. Unfortunately, neither of these arguments is based upon facts.
Analysis
Technically, as I have said for many weeks, the SPX is headed toward 1100+, but I cannot help but feel that our happy days are numbered. Below is a quick discussion of two pillars of the bullish argument – money market assets and housing.
I find it confusing that strategists keep using the size of money markets as a reason why the market will continue to rise. The argument seems to be that although money market assets have fallen by $420 billion to $3.5trillion as the market has rallied, that this is still quite a lot of money to be on the sidelines (The assumption being that this cash has gone to and will continue to go to equities and other riskier assets). This logic must assume that there is some negative correlation between the size of money market funds and the subsequent rise in the stock market value. If we just look back to 2000, however, it seems more logical that money markets funds have grown regardless of the market. They grew from $1.8 to $2.9 trillion (+61%) while the S&P500 market capitalization went from $10 trillion to 14 trillion (+40%). Using the same logic strategists are using now, as the SPX market cap rose from April 2005 to October 2007, assets should have been flowing out of money markets into stocks, yet somehow money market assets grew by 61% while the market cap of the SPX only grew by 40%.
One reason the stock market is rising is a belief that the worst of the housing crisis is behind us. I firmly believe that no matter what the stock market is doing, if the housing market is not fixed, the PARTY THAT STARTED IN MARCH’S days are numbered. Andrew Upward (FMR) wrote a great piece yesterday 9/28/09 on the housing market. Andrew attended a presentation on the housing market by hedge fund manager Whitney Tilson. He also quoted some disturbing figures published by Amherst Security Group, a boutique research firm. I will summarize or quote here:
1. The inventory problem will eventually overwhelm all the programs designed to fix the problem We have a “latent inventory problem that Tilson believes will continue to overwhelm price-supportive”.
2. “Amherst estimates that 12.42% mortgaged, 1-4 unit residential properties (that is, almost 92% of the 13.54% mortgages in some state of delinquency or foreclosure) will eventually be liquidated. Given that roughly 56 million such properties exist, Amherst expects that somewhere in the neighborhood of 7 million liquidations are “in the pipeline.””
3. At least part of the problem that prevents the government’s measures from working has to do with the simple fact that many people have negative equity in the homes and this is a severe disincentive to make good on their mortgages. In other words, when it comes down to it, most will give their homes back to the bank instead of struggle to pay and wait a decade for prices to turn them right side up.
Interesting to note that after being one of the outperformers from the bottom, the Homebuilders have lagged behind the SPX the last month. (Since 8/31/09 normalized - SPX +4%, Homebuilders -8%)
The housing problem along with unemployment at 9.7% will eventually be a reason for the economy and the stock market to stall, but for now managers will continue to chase returns.
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This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
